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Athlon Energy Inc. (NYSE: ATHL) cobbled together a deal with five unrelated parties to buy Midland Basin acreage close to home for $873 million in cash, the company said April 8.
The purchase increases Athlon’s holdings in the basin by 23,500 net acres. The day after the deal was announced, the company looked to raise capital by filing notice of a stock offering.
The producing properties and undeveloped acreage are located near Athlon’s operating areas. The properties are 100% operated and are mostly concentrated on the western side of the northern Midland Basin in Martin, Upton, Andrews and Glasscock counties, Texas.
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Including the acquisitions, Athlon has a total of 134,000 net acres in the Midland Basin. The added acreage gives the Fort Worth, Texas-based company exposure across the entire northern basin as a top-tier operator, said Bob Reeves, Athlon chairman, president and CEO, in the release.
The company has identified 840 gross vertical drilling locations on its newly-added properties. Less than 20% of these estimated vertical locations have been drilled to-date and Athlon expects vertical development will represent years of low-risk growth potential.
The acquired properties will require one vertical rig drilling about 20 wells per year to hold the acreage, which the company believes can be accomplished through reallocation of its existing eight vertical rig fleet.
The acreage is highly prospective for horizontal development as well with 425 identified gross potential locations in six zones including the Wolfcamp A&B, Lower and Middle Spraberry, Wolfcamp D and Clearfork horizons.
Athlon is operating one horizontal rig and plans to add its second rig at the end of April, said Pearce Hammond, managing director and co-head of E&P research for Simmons & Co. International.
Athlon now plans to add a third horizontal rig when the Midland deal closes and will then accelerate to four horizontal rigs by the fourth quarter of 2014. Athlon has not formally updated its capex budget.
Athlon has added 36,000 net acres since its IPO in the summer of 2013. It has 61,000 net acres in Midland, Martin and other areas compared to the 57,000 net acres in Howard County in the Midland Basin.
“In our view, the acquisition helps diversify ATHL from a ‘Howard County’ horizontal story,” although pending well results from the Abel 18-3H well will be important to watch, said David Tameron, senior analyst for Wells Fargo Securities.
The acquisitions are expected to be immediately accretive to cash flow per share and earnings per share as well as net asset value.
“Today’s acquisitions exemplify Athlon’s core strategy of acquiring only high-quality properties, demanding strong economic returns, and applying extensive technical expertise to exploit our huge resource potential through the drill bit,” Reeves said.
After announcing the deal, Athlon filed documents April 9 with the Securities and Exchange Commission to offer 11 million shares to raise capital, Tameron said.
The sale of the shares would leave about $500 million to fund with a combination of borrowings under its existing revolving credit facility and equity and debt capital markets.
Athlon expects its revolving credit facility to increase from $525 million to $1 billion as a result of additional proved reserves added through its drilling program and 2014 acquisitions. The transactions are expected to close by June.
Nonetheless, the deal appears to be on the expensive side, Tameron said.
At $80,000 per flowing barrel, the remaining valuation would be about $21,000 per net acre. But in the Permian environment competition for acreage is high and the price was in line with similar acquisitions.
GHS Research assumed $60,000 per flowing barrel, putting the transaction price at $24,900 per undeveloped acre. The most recent comparable deal was Diamondback Energy Inc.’s (NASDAQ: FANG) $288 million acquisition of 4,680 net acres in the Midland Basin, which GHS valued at $27,000 per acre after crediting production, said Mike Kelly, senior analyst.
Tudor, Pickering, Holt & Co. was financial advisor for the sellers of Permian properties to Athlon Energy.
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